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Current Economic Statistics and Review For the
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Theme
of the week:
Issues in Spectrum Allocation*
As
a demand booster, reduction in tariffs and cost of handsets, which
essentially make the service affordable for the users coupled with
increasing coverage, has supplemented the growth of the Indian telecom
sector. The
government’s target of 250 million telephone subscribers by December 2007
has thus been met much before the stipulated deadline. Teledensity (the
number of telephone subscribers per 100 people) has grown from 6.65
per cent in December 2003 to 11.43 per cent in December 2005 and further to
a level of 23.89 per cent in December 2007 (Chart A).
While
the rapid rise in mobile phones has significantly accelerated the growth of
tele-density, it has also raised the requirement for spectrum (the
electromagnetic radio frequencies used by the mobile telecom service
providers in transmission of voice and data) significantly. Currently,
Global System for Mobile (GSM), Code Division Multiple Access (CDMA) and
Cor-DECT technologies are operational in the country with each one of them
having some claims to the spectrum. In fact, the GSM technology is more
bandwidth-efficient. The other evolving technology is the WAN technology,
which is based on IEEE 802 series of standards and use frequency bands 2.5
GHz, and 5 GHz. These services are yet to be launched and thus their
ultimate spectrum requirement will not be known for some time. Since
spectrum is a scarce natural resource, it
has to be shared among a very large number of radio communication services
and users – defence, civil, government and private–based on the
principles of coexistence and most efficient use. Therefore,
the issue of sufficient spectrum availability for mobile services is
indispensable to the growth of these services in the country. This leads to
the need to examine two aspects, first, is the spectrum being utilised
efficiently and second, is the total available spectrum adequate to meet the
rising requirements. This in turn has necessitated regulatory authorities to
examine the issues linked with the adequacy of spectrum. Scarcity
of Spectrum
In
recent years, shortage of spectrum has generated controversy and it is
intensifying due to the expanding mobile subscriber’s base. At present,
the Indian telecom industry is in the midst of a hot debate on the issue of
spectrum allocation and the basis for entry fee for third generation (3G).
GSM and CDMA players are at loggerheads over spectrum allocation as both
sides claim that the existing spectrum policy is biased. The conflict for
getting additional spectrum becomes deeper mainly due to, rising pressure
owing to burgeoning mobile subscriber base, and the escalating competition
among the service providers in the struggle for customer acquisition and
retention by offering value-added services. While
GSM operators say that they are paying a higher spectrum charge, the CDMA
players say that they have less quantum of radio frequency. The fight is
just getting overheated as GSM and CDMA players refuse to budge from their
stand. The two groups of operators are contesting each other’s claim over
spectrum. While
the rivalry between the CDMA operators led by Reliance Communications (RCom)
and Tata Telecom on the one hand, and the GSM operators led by Airtel and
Idea on the other hand, had been going on for a long time, it has only
intensified in recent times as RCom revealed its plan to offer dual
technology i.e. providing both CDMA and GSM services to customers. The GSM
operators alleged that the telecom policy has been jerked to favour Rcom,
offering it a significant chunk of spectrum and had sought the Prime
Minister’s intervention to arrive at an amicable solution. While the GSM
players argue that new players should be allowed extra spectrum after
ensuring enough spectrum for the existing players, RCom suggests that
existing operators should be asked to give up spectrum in excess of 6.2 Mhz.
The
Controversy
In
fact, the present controversy began with the recommendations of the TRAI,
which suggested equal amount of frequency to all the technologies. The CDMA
players have about 5 Mhz of spectrum while the GSM have about 10 Mhz. In
2005, TRAI had suggested that both CDMA and GSM operators be given equal
spectrum access to provide a level-playing field as world over most of the
countries, for instance, Further,
the Association of Unified Service Providers of India (AUSPI) representing,
the CDMA camp, stated that the Government must give at least 20 Mhz of radio
frequency following international practice as there should be absolute
equality between the two competing technologies — GSM and CDMA. The AUSPI
also said that, “The policy's main thrust must be equal amount of spectrum
allocation. The criteria for usage and efficiency should be uniformly
applicable to all operators irrespective of the technology.” Later
on, in a presentation to the Communication Minister, Tata Telecom complained
that the CDMA players in the country are at a disadvantageous position
compared to their counterparts in other parts of the world when it comes to
spectrum allocation. Further, it stated that the current complicated and
inequitable spectrum allocation processes had prevented the Indian CDMA
industry from offering international roaming. Parliamentary
Committee
Meanwhile,
with congestion on mobile network worsening, the CDMA and the GSM operators
met the Parliamentary Standing Committee to present their case for releasing
additional spectrum. The CDMA operators said that additional frequency
should be made available in the 800 Mhz and 1900 Mhz band in which handsets
and infrastructure are readily available. On the other hand, the GSM
operators said that, “the present spectrum practices discriminate against
GSM operators and their 50 million customers. CDMA operators are being given
a backdoor entry for third generation services and CDMA operators are being
given cost and competitive edge over GSM”. The
parliamentary committee report stated that decisions on spectrum related
issues, being very critical and sensitive in nature are to be handled very
carefully, but such issues cannot be kept pending forever. The committee has
hauled up the Department of Telecom (DoT) for moving slow in formulating the
spectrum policy and also blamed DoT for the crunch in spectrum availability
being faced by the telecom operators, which is hindering faster growth of
services. Further, the report said that, “the lack of foresighted planning
on the part of the department has led to ad hoc and injudicious allocation
of spectrum which, in turn, has caused non-availability of this scarce
resource to the telecom operators when they need it most for faster
expansion of services throughout the country. Needless to say, lack of
anticipated demand for spectrum and haphazard planning over a period of time
has given birth to a horde of problems”. The committee also recommended
that the Government may allot the controversial 1,900 Mhz spectrum to CDMA-based
operators. Subscriber-linked
Spectrum Allocation
In
order to sort out the complex issue of spectrum allocation, TRAI suggested
enhancement of the subscriber link criterion for allocation of frequency
spectrum to the telecom companies that included both the GSM and CDMA
operators. Accordingly, DoT announced the subscriber-linked spectrum
allocation policy. Private GSM companies, namely, Airtel, Idea and Hutch and
state-owned public sector companies BSNL and MTNL, equipment vendors such as
Nokia and Ericsson supported the policy. Surprisingly, RCom (CDMA
technology-based company) also welcomed the new policy. According to
industry sources, except for Tatas and the promoter of CDMA technology
Qualcomm, the entire industry supported the subscriber-linked spectrum
allocation policy. The Tatas on the other hand took a position that
operators would exaggerate their subscriber numbers to get additional
spectrum. As
a result, to sort the above issue, the government then mandated the
Telecommunication Engineering Center (TEC), a technical body which sets
standards with regard to telecom network equipment, to come out with an
amicable solution to the spectrum row. However, the TEC proposed stricter
conditions, than those proposed by TRAI. For instance, as per the TEC’s
recommendation, in a metropolitan city like This
issue took a new turn when DoT constituted a new committee with the
representatives of the industry, the scientific community and DoT to decide
if the government should go with the TRAI’s report or accept the
recommendation of TEC for rolling out additional frequencies to GSM players.
Further, this official panel proposed several new measures. The panel favoured the auction route for allocating additional spectrum and also suggested that the existing GSM players be given additional spectrum in quantities of 1 MHz each against the 1.8 – 2.2 MHz. The panel also proposed that “A new technical committee should be set up to specify the method of allotting incremental spectrum to the existing players”. Auction
Route
Auctioning
of the spectrum was one of the attractive proposals in allocating additional
spectrum. However, a disadvantage that is often voiced against auctions is
that costs will be passed on to users through higher tariffs. Moreover,
auction induces gambling and, therefore, telecom analysts were against the
method of auction for allocation of spectrum. In
fact, some telecom analysts argue that if competitive bidding can be used
for oil and gas blocks, then why not for frequency spectrum. Analysts
suggested that new bands of spectrum should be auctioned as there would be
fair competition; operators who value it most will get it. However, the
government has decided not to auction 2G spectrum for the new players so as
to maintain a level-playing filed between existing and the new service
providers. Some experts suggest that spectrum be allocated through a
transparent auction system, which will encourage more players to enter the
telecom industry and will ensure sustainable competition. But at the same
time, the distribution of spectrum needs to be efficient. TRAI’s
Recommendations
In
May 2005, TRAI has recommended that existing operators should be given
spectrum to offer 3G services without any additional entry fee. The telecom
regulator has also suggested bringing down the annual spectrum charges fee
to 4 per cent a year, from a maximum of 6 per cent of the operator’s
revenue, which may also help in lowering the mobile tariffs further. In
its recommendations, TRAI said, “Spectrum policy recommendations are based
on the Government's target of 200 million mobile phones by 2007, adequate
spectrum to operators to permit longer term spectrally efficient planning,
reduced input costs for telecom services so as to increase the coverage in
semi-urban and rural areas and ensuring roll-out of 3G services.” Thus
TRAI urged the Government to allot additional frequency on an urgent basis,
at the same time it has also imposed roll-out obligations on operators to
prevent hoarding spectrum. The regulator also suggested that the Government
could cancel the allocated frequency if services are not rolled out within
two years.
The
regulator opined that in order to maintain the level playing field, new
operators will have to pay a one-time entry fee for getting 3G spectrum
which will be same as those being paid by mobile companies under the unified
licence regime. Furthermore, TRAI has recommended setting up a Group of
Ministers to monitor the allocation of spectrum. On the controversial
1,900-Mhz band, TRAI has said that the frequency could not be released since
it was being used by defence agencies. Administrative
Incentive Pricing (AIP) Model This
pricing model is used in several countries like Spectrum
Allocation Delay Telecom
operators are on a warpath against each other owing to the delay in solving
the complex issue of spectrum allocation. It is not just the mobile
operators using GSM and CDMA technologies that are trading charges against
each other on the issue but the GSM operators and their public sector
counterparts are also on loggerheads. In
its report submitted to the DoT, the TEC has not only proposed a 100 per
cent hike in spectrum usage charges originally recommended by TRAI but also
supported enhanced subscriber-linked criteria for additional spectrum
allocation that will make it difficult for existing subscribers to get
additional frequency to expand their services.
Meanwhile, another point was added to the entire spectrum row a few
days ago when the COAI accused the DoT of favouring two state run telecom
companies, BSNL and MTNL by allocating them additional spectrum. However,
the government may relax the TEC’s finalised spectrum allocation
criterion. A press release from DoT stated that a committee would be
constituted to revise the spectrum allocation criterion for existing
operators “in a scientific and practicable manner”. The committee will
comprise external experts and representation from the COAI and Association
of Unified Service Providers of India (AUSP). The move comes after the
existing GSM operators criticized the TEC’s report, which asked operators
to pack in more subscribers before they become eligible for additional
spectrum. The
GSM companies, however, reacted by blaming the country’s lopsided spectrum
allocation policy and hazard planning, which has acted as roadblocks to
mobile telephone services. Auction
of Spectrum for 3G and Wi-Max Service In
yet another blow to existing GSM operators, the Ministry of Communications
has decided to auction spectrum for 3G mobile services and wireless
broadband services through technologies such as Wi-Max. The auction will be
open to new companies wanting to foray into the telecom sector as well as
established foreign telecom companies. The Ministry’s decision to open up
the bidding to all players is also a move away from the telecom
regulator’s recommendations that it be restricted to existing operators.
In fact, the ministry’s decision to open 3G telecom services through an
open spectrum auction would help to accommodate more players and enable the
provision of value-added services through broadband even in rural areas. Approval
for Spectrum Allocation Ending
months of uncertainty over spectrum allocation and new telecom service
licences, in a recent move, the government has
decided to allocate additional spectrum to the existing GSM companies based
on TRAI’s subscriber-linked formula and it has been accepted by COAI. The
government gave in-principle approval for allocation of spectrum to (a) GSM
operators who have been waiting for frequency since 2006, (b) CDMA players
entering the GSM segment and (c) to new players. With this, the IT Minister,
in an attempt in solving the complex issue of spectrum allocation, has met
the GSM operators' demand that they should be given priority ahead of others
in spectrum allocation. Among the beneficiaries, existing operators include
Aircel, Vodafone-Essar and Idea Cellular, while RCom, HFCL and Shyam Telecom
would benefit under the dual technology clause. As regards new aspirants,
the government issued Letter of Intents (LoIs) to all the eligible
applicants, who have applied before September 25, 2007, on a
first-come-first serve basis. Accordingly, DoT issued (LoIs) to 9
applicants among 45 applicants, while rejecting the applications of 3 firms.
The nine companies issued LoIs includes Unitech, Shyam Telelink, Datacon and
Shippingstop Dotcom for pan Among the existing GSM players, Aircel, Idea Cellular and Vodafone-Essar will receive the 4.4 Mhz for some circles to complete their national footprint, at the existing price based on Rs 1,651 crore for nationwide spectrum. Besides them, RCom, which currently offers CDMA services, would also get GSM spectrum under the government’s controversial decision of October 19, 2007 to allow companies to launch cellular operations in both technologies, GSM operators challenged the dual technology decision at the telecom tribunal. According to DoT officials, the government has enough spectrum to accommodate at least 5 to 6 new players after meeting the demands of existing GSM players as well as RCom, which has been permitted to start GSM services under the dual technology clause. In another significant development, DoT has also cleared the Tatas application for GSM spectrum. Importantly, the applications of existing GSM operators such as Bharti for additional spectrum, which have been pending for close to two years, have also been cleared. Initially
Idea, Vodafone and Aircel will now be given 4.4 Mhz of start-up GSM spectrum
for launching services in each of the circles where they hold licenses. Subsequently,
Vodafone Essar has intimated its willingness to start operations in new
circles. However, this is in variance with current norms, where operators
need to have at least 4.4 Mhz of spectrum to start their services. According
to telecom experts, this move would also compromise the quality of their
services. The initiative comes at a time when the TRAI is looking at ways to
improve the quality of mobile telephone services in the country. Conclusion Since
spectrum is always a limited resource in every country and mobile telephony
becomes possible only through it, competing companies will put forward their
criteria most favourable to themselves and try to sell them as though they
are in the interest of the nation and in particular, the industry. The
spectrum controversy which began in However, in solving the complex issue of spectrum allocation, the government should resolve, without delay the policy issues in a cautiously planned and co-ordinated manner. So that equitable distribution of the existing resources would be made among all the players. That public policy is good, which causes least harm to the least number of companies and the maximum benefit to the users by way of low prices. So, it is better that in the long run the regulator should be empowered to implement the government’s policies besides making recommendations to the policy-makers. References
TRAI
(2004): ‘Consultation Paper on Spectrum related issues: Efficient
Utilisation, Spectrum Allocation, and Spectrum Pricing’, May
31. GOI
(2002): ‘Report of the Steering Committee on communication and for the
Tenth Five Year Plan (2002-2007) Planning Commission, May. Jain
R, ‘Framework for Review of Indian Spectrum Management Policies’ IIM
Ahmedabad. Sisodiya
A S & Pothal S P (2008): ‘Spectrum Scuffle – War for the (Air)
Waves’, The Analyst, February. Business
Line (2006): ‘CDMA camp divided over spectrum allocation’, May 28. Business
Line (2005): ‘Sharing Spectrum’, August 22. Business
Line (2005): ‘Ratan Tata favours entry fee, revenue share for 3G Spectrum
Sharing Spectrum’, May 14. Business
Line (2005): ‘Panel pulls up DoT for delay in spectrum policy’, December
27. Business
Line (2005): ‘GSM, CDMA operators meet Parliamentary panel on spectrum
issue’, October 24. Business
Line (2005): ‘CDMA players want GSM spectrum to be halved’, September
13. Business
Line (2005): ‘Raw deal for Indian CDMA players v/s global peers’,
September 12. Business
Line (2005): ‘TRAI proposes cut in spectrum charges’, May 13. Business Line (2005): ‘Spectrum allocation – Disturbing the CDMA-GSM wavelength? ’ May 19. * This note has been prepared by Bipin K. Deokar
Highlights of Current Economic Scene AGRICULTURE As
per All India Rice Exporters Association, central government is likely to
increase the minimum export price of non-basmati rice to around US $
600-US $ 650 per tonne from US $ 500 per tonne for discouraging exports
and improving domestic supplies. During the period between April-October
2007-08, The
Ministry of Commerce is likely to expand the definition of basmati rice by
allowing large number of rice varieties to be identified under basmati
brand, which would include varieties such as pusa-1121 and Mangala Rai. STC
has planned to supply 20,000 tonnes of parboiled rice worth Rs 30 crore to
As
per the official from the Pulses Importers Association of India,
production of rabi pulses is likely to fall by 8.8 per cent to 85.7 lakh
tonnes in 2007-08 against 94 lakh tonnes last year, due to deficiency of
rain and cold wave conditions prevailing in the country. It is estimated
that shortfall in the output of winter pulses and rising demand in the
domestic market would force According
to estimates by According
to Solvent Extractor Association of India, vegetable oil imports in India
during the oil-year (October- September) 2007-08 is likely to rise by 7.2
per cent to 5.9 million tonnes as compared with 5.5 million tonnes
registered a year ago, due to lower carry forward stock of oilseed and
rising oil consumption. It is expected that The
Indian Olive Association has urged the central government to abolish
customs duty of 45 per cent and 40 per cent imposed on virgin olive oil,
refined and pomace olive oil, respectively. These rates are very high as
compared with non-olive producing countries like According
to survey conducted by ORGMARG on behalf of Solvent Extractor Association
of India (SEAI), the total area under castor cultivation in Supreme
Court, on February 21, 2008, has asked the government of Uttar Pradesh not
to take coercive action against the private millers with cane arrears for
the 2006-07 season. After the Supreme Court’s order, shares of most of
the sugar firms with mills in the state have raised between 3 and 4.94 per
cent touching intra-day high. Prevalence
of cold climate in most parts of According
to the Spices Board, exports of spices from India is likely to cross the
target of 3.8 lakh tonnes valued at Rs 3,600 crore for the current fiscal.
The total shipments during the period between April-January 2007-08 was at
3,49776 tonnes valued at Rs 3,485.48 crore as compared with 292,185 tonnes
valued at Rs 2850.45 crore during the corresponding period of previous
year, showing increase in terms of both volume and value by 20 per cent
and 22 per cent, respectively. During the same period exports of spices
like chilli and mint products have exceeded the targets both in value and
volume terms. Exports of coriander and cumin have exceeded their
respective targets in value terms and that of vanilla in volume terms.
Spices such as pepper, chilli cardamom, coriander, fennel, fenugreek,
vanilla and value added spice products like curry powder, spice oil and
oleoresins have also shown improvement in their export performance
compared to last year. According
to Indian Jute Mills Association (IJMA) the minimum support price of raw
jute (Assam TD5 variety) in the jute year 2008-09 is likely to be raised
to Rs 1,250 per quintal, an increase of Rs 195 over the last year’s
support price of Rs 1,055 per quintal. The
Reserve Bank of India (RBI) as on February 20, 2008 has asked the banks to
reschedule loans given to the poultry units across the countries to
implement relief measures for poultry industry, which is badly hit by the
bird flu. The relief measures would include one-year moratorium on
repayment of outstanding loans, conversion of working capital loans into
term loans and rescheduling of term. The
state government of According
to worldwide data compiled by the International Service for the
Acquisition of Agri-Biotech Applications (ISAAA), the total acreages
planted under all GM crops has accounted to 114.3 million hectares in
2007. Out of this, nearly 57.7 million hectares has been accounted by the According
to the Crop Care Foundation of India, the crop
losses at the production stage due to pests, weeds and diseases in the
country has been Rs 1.48 lakh crore per year. As per the data from
Organisation for Economic and Development (OCED), the per hectare use of
pesticides in India is 0.33 kg as compared with 3 kg in France, 4.17 kg in
Italy and 13.14 kg in Japan. In 2002, Industry A pick up in the production of all the major group during December pushed up the index of industrial production from 5.1 per cent in November to 7.6 per cent in December 2007. As a result during the fiscal so far registered an increase of 9.0 per cent as against 11.2 per cent last year. Mining sector and electricity sector grew by 3.0 per cent and 3.8 per cent during the month. The growth of manufacturing sector is at 8.4 per cent during December is much below to that of 14.5 per cent recorded last December. Out of the 17 industries, four industries declined and five industries registered double digit growth.. As per use-based classification, the sect oral growth rates in December 2007 over December 2006 are 3.1 per cent in basic goods industries, 16.6 per cent in capital goods and 7.2 per cent in intermediate goods. Consumer goods recorded an increase of 8.7 per cent. Infrastructure The
index of six core infrastructure industries having a combined weight of
26.7 per cent in the index of industrial production registered a slower
growth of 4.0 per cent as compared to 9.0 per cent in December 2007. The
dismal performance of crude petroleum which registered a negative growth
of 1.5 per cent against a growth of 6.0 per cent last year, and
comparatively lower growth performance of refinery products, electricity,
cement, steel all contributed for the lower rate of growth. However, coal
production for the fourth month in succession registered a faster growth
with its production rate registering a growth of 8.4 per cent in December
2007 as against a low growth of 2.9 per cent in November 2006 Inflation The
annual rate of inflation calculated on a point-to-point basis, rose by
4.89 per cent for the week ended February 16,2008 as compared 4.35 per
cent as on February 17,2007. Index
of Primary Articles group rose by 0.1 per cent to 225.3 from 225.0 for the
previous week. Food articles group however declined by 0.2 per cent. Index
of non-food articles rose by 1.1 per cent mainly due to higher prices The
index for the major group Fuel, Power, Light and Lubricants increased to
336.9 from 334.0 due to higher prices of bitumen, petrol, high speed
diesel oil and light diesel oil. The
index of manufactured products went up by 0.2 per cent due to higher
prices of gingelly oil, groundnut oil and gur. The
final WPI for all commodities had been revised upward from 216.4 to 215.9
for the week ended December 22,2007. As a result the rate of inflation
calculated on a point-to-point basis stood at 3.74 per cent as compared to
3.50 per cent provisional. Banking Tamil
Nadu Mercantile Bank formally announced that a foreign investor’s
consortium led by Ramesh Vangal had paid Rs 186 crore to Sterling Group,
controlled by NRI businessman C Sivasankaran, to but its 95,418 shares
aggregating 24.93 per cent stake in TMB. Centurion
Bank of Financial
Market Capital
Markets Primary
Market The
Economic Survey for 2007-08 has said that domestic corporates would step
up their access to the primary market to raise resources both through
equity and debt issues. Alongside, the overseas issues (ADR/GDR) too are
expected to gain in importance to supplement the domestic resource
mobilization by the corporates. In calendar year 2007, total equity
mobilised was Rs 58,722 crore, of which Rs 33,912 crore was accounted for
by the initial public offerings (IPOs). During 2007, the total number of
IPOs issued was 100 as compared to 75 in the previous year. There has been
a recent pick-up in the amount of resource mobilisation by mutual funds
and the assets under management (AUM) indicated increased preference for
investment in the capital market via mutual funds. The Survey however
noted that a major policy challenge was in the area of corporate debt
market. Tulsi
Extrusions and IRB Infrastructure Developers on February 25,2008 made
their debut on the capital markets at a premium on NSE. Tulsi Extrusions,
PVC pipes and fittings manufacturer for the irrigation, industrial,
infrastructure and housing sector, opened at a premium of 16.47 per cent
against its issue of Rs 85 on the NSE. IRB Infrastructure Developers,
company engaged in road and highway construction and maintenance, opened
at a premium of 5.35 per cent against its issue price of Rs 185 and closed
at Rs 189.65 as per NSE. While on BSE, the stock opened at a discount of
8.08 per cent against the issue price. When trading closed for the day,
the share price stood at Rs189.05. The shares of both Tulsi Extrusions and
IRB Infrastructure Developers were amongst the most actively traded on the
NSE on February 25,2008. Tulsi Extrusions, in fact, was the top gainer on
NSE closing 65 per cent up than its opening price. State-run
Rural Electrification Corporation (REC) Ltd on February 29,2008 fixed the
price at Rs 105 per equity share – the top end of its price band. Secondary
Market The
key Budget-cum-derivatives settlement weekended with marginal gains after
a small post-Budget sell off. The BSE Sensex was up 1.32 per cent at
17,578 points while the NSE Nifty closed at 5,223.5 for a week-on-week
return of 2.2 per cent. Among the sectoral indices of BSE, Healthcare and
Auto gained marginally over the week by 4.91 and 3.81 respectively. Among
the losers consumer durable lost 3.9 per cent during the week. In
the Union Budget announced on February 29, the finance minister hiked the
short-term capital gains tax from 10 per cent to 15 per cent, in order to
encourage investors to stay invested for a longer term, but market players
termed it as a sentiment-spoiler. According to the proposal, the amount of
STT paid by the broker will be allowed as deduction under Section 36 of
the Income Tax Act only if the income from these transactions is included
under the head "profits and gains of business or profession”. The
amendment will take effect from April 1, 2008 and will apply in relation
to assessment year 2009-10 and subsequent assessment years. The rebate
will not be allowed in or after assessment year beginning April 1, 2009.
The
finance minister has also proposed to bring the stock, commodity exchanges
and clearing houses under the service tax net. As per the proposal, the
service tax would be charged by stock exchanges on the exchange
transaction fees, listing fees, data discrimination charges (data provided
to brokers by exchanges for fees) and on property rent if any being
received by the stock exchanges. The service tax would be passed on to the
stock brokers, which they would set off with the service tax on brokerage.
The
Central Board of Direct Taxes (CBDT) has exempted stock lending/borrowing
from the purview of securities transaction tax (STT) and capital gains
tax. Borrowers will make some payment to lenders of shares by way of
interest or fees that will be income in the hands of the lender. While
selling the shares, borrower will not be paying any tax as the gain from
such sale is not known. However, the Central Board of Direct Taxes (CBDT)
has exempted stock lending/borrowing from the purview of securities
transaction tax (STT) and capital gains tax. CBDT has issued a circular in
this regard to the income tax field formations. As
per the Securities and Exchange Board of India (SEBI) rules, the
disclaimer (mutual fund investments are subject to market risks, read the
offer document carefully before investing) is necessary for every mutual
fund product advertisement. And, while following the stipulation, the
advertisers apparently try to keep the public from hearing it by resorting
to speed-reading. However, a SEBI circular issued today is set to change
all that. SEBI has mandated that with effect from April 1, 2008, the time
for display and voice over of the standard warning be enhanced to five
seconds in audiovisual advertisements. In case of audio advertisements,
the standard warning shall be read in an easily understandable manner over
a period of five seconds. SEBI
also planning to simplify the offer document (OD) of mutual funds new fund
offerings (NFOs) in a move to make it investment decisions easier.
SEBI has reportedly held two rounds of discussions with the
Association of Mutual Funds in India (AMFI), which is the body for mutual
funds in the country. The
proposal is likely to be referred to the SEBI board shortly, sources said.
The new rule will reduce the costs and time involved in preparing
and filing offer documents with SEBI.
The
trading volume in the Indian securities market, which has already come
down by half after the market crash of January-end, may continue to
decline following the Union Budget’s proposal to hike the short-term
capital gains tax by 50 per cent and the change in the computation method
of the securities transaction tax (STT) from April 1, 2008. The Union
Budget has proposed to discontinue the rebate (under section 88E of the
Income Tax Act) for the STT paid (and to consider it as business expense
instead). According to HDFC Securities, this could result in higher
effective tax outgo for traders, impacting volumes of day traders and
arbitrageurs. Trading volumes, however, can go up if there is another
crash in the market. This is because during the crash of January 21 and
22, (the Sensex fell by 2,284 points to 16,729 in two days), the turnover
was higher at Rs 33,859 crore (BSE at Rs 9,334.40 crore and NSE at Rs
24,245 crore) mainly due to sell-off of clients positions by brokerage
houses to meet mark-to-market requirements.
A levy of tax on services of stock exchanges and clearing
corporations could also result in an increase in transaction costs for
traders and investors.
Derivatives Smooth
rollovers were witnessed on last day of the February expiry, with 84 per
cent of the total positions being rolled over compared to 79 per cent in
the previous expiry and an average of 82 per cent in the last few months.
On lines of the last expiry, there were no aggressive long
rollovers on expiry day and the roll cost remained at 55 basis points. In
value terms, the market wide-open interest, however, declined by 5.6 per
cent. Turnover stayed lackluster in the derivatives market despite the
successive trading triggers of settlement and Budget. However, February
went through smoothly and there was a reasonable amount of carryover and
some improvement in sentiment. The Nifty's historical volatility was high
last week but lower than it's been since mid-January. The Nifty traded
through last week at a daily historical volatility of around 2.65 per
cent. It was consistently above 3.25 per cent earlier that means the index
has settled down to swing through a daily range of 30-50 less. The cash
Nifty closed at 5,223.5 while the Nifty March futures were held at 5,181,
April was settled at 5,161 and May was settled at 5,161. There is
negligible open interest in May, which is another bearish signal. The
Junior was settled at 9,587 while the cash index closed at 9,636 there is
no open interest in April and May. The CNXIT closed at 3984.5 and the
futures settled at 3,960.1. There
is a potential calendar spread in short March Nifty versus long April
Nifty but it's too early in the settlement to take this on. In terms of
technical positions, most of the indices are locked into trading ranges.
In the index options market, the put-call ratio is at healthier levels
than normal. Long-standing
demand of brokers has been met in the Union Budget with the proposal to
charge STT only on the premium of the options trades and this will be
collected from the seller. In case of exercised options, it will be
charged from the buyer. The amendment comes into effect from June 1, 2008.
Government
Securities Market Primary
Market On
February 27, 2008, RBI auctioned 91-day and 364-day T-bills for the
notified amounts of Rs.500 crore and Rs.1,000 crore respectively. The
cut-off yields for 91-day and 364-day T-bills were 7.44 per cent and 7.55
per cent respectively. Secondary
Market During
the week, call rates ruled at 6.45-7.74 per cent. The liquidity gap
created by auction-related outflows and lack of consistent inflows pushed
up call rates above 8 per cent. The Reserve Bank of India (RBI) infused
cash through the LAF window, on an average accepting bids worth Rs 16,728
crore at the repos. At the week-end liquidity adjustment facility auction,
the recourse to the RBI’s reverse repurchase window was for Rs 8,085
crore. The recourse was also partly driven by current account inflows as
exporters encashed their exchange rate profits. CBLO Segment recorded the
highest volumes of Rs.51,548 crore on February 28, 2008. The cumulative
CBLO volumes for the week rose to Rs 2,22,581 crore from Rs 1,96,306 crore.
The overnight weighted average yield was lower at 7.37 per cent against
7.63 per cent. The finance ministry is preparing for huge dollar inflows next year as well, going by the provision for market stabilisation bonds (MSS) in 2008-09. The MSS issuances budgeted for 2008-09 are Rs 2,55,806 crore, significantly higher than the estimate of Rs 1,41,135 crore in the 2007-08 Budget, and marginally lower than the actual issuance of Rs 2,71,903 crore in the financial year on account of equity investments by foreign institutional investors (FIIs) and overseas borrowings by companies. Tradability
of domestic convertible bonds to be enhanced through the mechanism of
enabling investors to separate the embedded equity option from the
convertible bond, and trade it separately. Bond
Market Housing
Development Finance Corp Ltd tapped the market by the issuance of bonds by
offering 9.50 per cent for 5 years for an amount of Rs 300 crore.
The bond has been rated AAA by Crisil and Icra. On
February 29,2008, the government accepted the recommendations of the R H
Patil Committee report on corporate debt market, waived the tax to be
deducted at source (TDS) on the dematerialised trading of corporate bonds
listed on recognized stock exchanges. Further, to create a nation-wide
market, the government has urged the empowered committee of state finance
ministers to work out a uniform stamp duty structure for bonds.
Corporate bonds are thinly traded as the varying stamp duty and TDS
rates across states increase the cost of transaction, thereby driving the
retail investors towards fixed deposit schemes of mutual funds and banks.
Foreign
Exchange Market The
rupee ended the week around Rs 40 against the US dollar even though the
dollar hit lows against most currencies globally. The unit started the
week just a couple of paise below the Rs 40-mark by persistent dollar
demand from oil companies. The rupee fell to end the week lower at Rs
40.02 against the dollar and forward premia were pushed off highs. The
inflows allowed the rupee to advance against the dollar to Rs 39.92.
However, forward discounts were beginning to reverse track. Six months
forwards moved back into a premium of 0.25 per cent last week from a
discount of 0.3 per cent the previous week. The 12-month premium widened
to 0.48 per cent from 0.25 per cent. In
the 2008-09 union budget finance minister P Chidambaram announced
exchange-traded currency and interest rate futures to be launched and
transparent credit derivatives market to be developed with appropriate
safeguards. Commodities
Futures derivatives Finance
Minister P Chidambaram had proposed a commodity transaction tax (CTT) in
the Union Budget on the lines of the securities transaction tax. The
Forward Markets Commission (FMC) is expected to take up the matter of
introduction of CTT with the government. According to FMC Chairman B C
Khatua, the introduction of CTT is, totally unjustified, as the
commodities market is different from the equity market, for investment.
The transaction tax will make Indian markets unusable for risk management.
The budget has added an incidence of 12 per cent service charge and Rs 17
per lakh for commodities trading, which will increase the cost by over 800
per cent. As per his view, CTT will make an adverse impact on the futures
markets, which will result in a negative growth story for 23 commodity
exchanges in the country. National
Multi-Commodity Exchange (NMCE), the first bourse to start futures in
commodities four years ago, is considering various proposals, including
cost-effective linkages with warehouses of its partner Central Warehousing
Corporation (CWC). The
Ahmedabad-based exchange is also considering offering a discount in fee to
the members of the Bombay Stock Exchange (BSE), which on Monday picked up
a 26 per cent stake in the commodity exchange.
BSE members would not have to invest further in infrastructure to
trade on the commodity bourse, which otherwise would require Rs 6-7 lakh.
According to Rajnikant Patel, the MD and CEO of BSE, BSE’s foray into
the commodities market would bring 133 years of expertise, global brand
value, technology, best corporate governance practices and nationwide
reach. The country’s 24 commodity exchanges are likely to enjoy the liberty to launch products as the FMC, the commodity market regulator, is unlikely to come out with a regulation to check growing number of illiquid contracts on futures trading platforms. The commodity futures markets opened after 60 years of ban and are now hardly 4 years old. Therefore, commodity exchanges require more time to work on newly launched contracts to attract trades. According to FMC Chairman B C Khatua, they are surely going to enhance testing time for comexes and therefore, have no plan to delist illiquid products. Budget
Highlights: Revenue deficit for the fiscal year 2007-08 has constituted 1.4 per cent of GDP as per the revised estimates (RE) as against a budget estimate (BE) of 1.5 per cent and the fiscal deficit has formed 3.1 per cent of GDP against a BE of 3.3 per cent. For the fiscal year 2008-09, the revenue deficit has been estimated to constitute 1.0 per cent of GDP amounting to Rs 55,184 crore. Fiscal deficit for the fiscal year 2008-09 has been estimated at Rs 1,33,287 crore which would be 2.5 per cent of GDP. The elimination of Revenue Deficit during the fiscal year 2008-09, as per FRBM targets, has been postponed by one more year. Thirteenth
Finance Commission has been requested to revisit the roadmap for fiscal
adjustment and suggest a suitably revised roadmap, after the obligations
on account of the Sixth Central Pay Commission become clear. Revenue
receipts of central government for the fiscal year 2008-09 have been
projected at Rs 6,02,935 crore and revenue expenditure has been budgeted
at Rs 6,58,119 crore. Plan
Expenditure has been estimated at Rs 243,386 crore whereas non-plan
expenditure has been estimated at Rs 507,499 crore. Tax ProposalsIndirect TaxesNo
change in the peak rate of customs duty has been made in the budget
2008-09. General CENVAT rate on all goods has been reduced from 16 per
cent to 14 per cent to give a stimulus to the manufacturing sector. Four
services have been brought under service tax net in the budget 2008-09
namely, asset management service provided under ULIP, services provided by
stock/commodity exchanges and clearing houses; right to use goods, in
cases where VAT is not payable; and customised software, to bring it on
par with packaged software and other IT services. Threshold limit of
exemption for small service providers has been increased from Rs.8 lakh
per year to Rs.10 lakh per year; about 65,000 small service providers go
out of the tax net. Direct
Taxes
Threshold limit of exemption from personal income tax in the case of all assesses has been increased to Rs 1,50,000 from Rs 1,10,000. The
slabs and rates of tax are as follows: Up
to Rs 1,50,000
NIL Rs
1,50,001 to Rs 3,00,000
10 per cent Rs
3,00,001 to Rs 5,00,000
20 per cent Rs
5,00,001 and above
30 per cent Threshold limit in case of a woman assessee, has been increased from Rs 1,45,000 to Rs 1,80,000; for a senior citizens, the threshold limit has been increased from Rs 1,95,000 to Rs 2,25,000. No
change in the corporate income tax rates and in the rate of surcharge. Rate
of tax on short term capital gains under Section 111A & Section 115AD
has been increased to 15 per cent from 10 per cent . Banking Cash Transaction Tax (BCTT) would be withdrawn with effect from April 1, 2009. Central Sales Tax rate would be reduced from 3 per cent to 2 per cent from April 1, 2008. Roadmap
for Goods and Service Tax would be prepared for introduction of GST from
April 1, 2010. Corporate
Sector ICICI
Venture and Jaypee Infratech have terminated negations for the PE player
buying close to 10-15 per cent stake for $800 million in the
infrastructure company, which is developing projects worth Rs 1 lakh crore.
Real
estate company Omaxe will set up a township at GMR
Infrastructure – which has Unitech,
the country’s second largest realty firm, has bagged two real estate
projects in Logistics
and supply chain management company Gati entered into a strategic alliance
with Amsterdam-based parcel service provider General Logistics Systems (GSL)
to start its operation in Telecom Bharti
Airtel, along with five international companies, will build a
high-bandwidth undersea fibre-optic cable linking in Asia to the Idea
Cellular and Spice has approached the telecom tribunal, ‘TDSAT’
against what they termed as ‘faulty implementation of the
first-come-first-served policy’ in the issue of spectrum by DoT. After
getting licences for National Long Distance (NLD) and International Long
Distance (ILD) services in India, UK-based telecom major Cable and
Wireless (C&W) will invest about $40 million to roll out its next
generation network connecting major Indian metros.
*These statistics and the accompanying review are a product arising from the work undertaken under the joint ICICI research centre.org-EPWRF Data Base Project. | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
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